Oil and Gas Producers Spending Enough to Grow Production Through 2010

Given the challenges associated with accessing capital these days, it comes as little surprise that many energy companies are not expected to maintain production volumes through 2010.

This is not necessarily a negative given many plays are not economic in the current environment, according to Dundee Securities analyst Grant Daunheimer. As a result, he said pouring additional capital into them is not good business in the short term.

The analyst told clients that the concern is longer term in nature.

When issuers stop spending and decline rates kick in, the treadmill runs pretty fast and recovering lost volumes becomes a daunting task. Countering this is a requirement to protect the balance sheet to maintain financial flexibility to survive the current weak commodity price environment.

So which junior and intermediate oil and gas producers are spending enough capital to maintain production volumes?

Mr. Daunheimer highlighted the companies best positioned to maintain balance sheet strength, grow production through 2010, and are spending more than merely maintenance capital. They are Angle Energy Inc., Breaker Energy Ltd. (BKRYF.PK), Crescent Point Energy Corp. (CPGCF.PK), Sabretooth Energy Ltd., Petrobank Energy and Resources Ltd. (PBEGF.PK), Storm Exploration Inc. (STXPF.PK), and TriStar Oil & Gas Ltd. (TOGSF.PK).

But how spending translates into production growth is not simple. For example. there is a delay between drilling a well and bringing it onto production.

In Dundee’s forecasts, the firm lags the spending to production effect by one quarter, which lengthens the capital to production cycle and pushes a portion of new production associated with 2009 spending into 2010.

“With gas prices as low as they are, many producers are not tying in new wells making the forecasting process even more complicated,” Mr. Daunheimer said.

Regardless, with resticted access to capital, maintaining financial flexibility in a weak commodity price environment is key.

Comments

[Davewmart:]

The IEA expects that shortages and price hikes will occur as soon as a recovery gathers steam, at least for oil:
www.montrealgazette.co...
The needed investment is just not happening due to low prices.

Jul 29 12:46 PM

[MarkitWacha:]

Think of this scenario:

* Oil price goes ballistic
* Natural gas stays the same, or nearly the same
* People start installing tanks in trunks for natural-gas powered vehicles.

There isn't enough trunk space in compact cars to hold pressure tanks. The C.A.R.S program is recycling vehicles that could handle these tanks.

The people in Mexico have been installing the pressurized gas tanks in trucks for years, because the PeMex gasoline stations cost nearly 4 times what it costs in the US. They are already economical.

... unforeseen consequences caused by government intervening where it has no business.

Jul 29 02:17 PM

[happycajun:]

Hey! If you are talking about the handful of pinksheet listed E&P's that you mention having access to enough capital to "grow production through 2010" that is one thing.... for the whole E&P sector to "grow production through 2010" is a whole 'nother fantasy! Just ain't happening. Regarding "decline rates kicking in," I'm not sure what Mr. Daunheimer is implying, but the basic depletion mechanics of a well are complex and depend a large number of factors, with drive and lift mechanisms being two principal issues in an oil well. Most oil wells will be most productive in their first year of operation, and the rate of production commences to decline at an exponential rate. Thus, the rate of production will drop more in the first year than in the second - etc... Again, this depends on drive and lift, but in general, it is how oil wells age. Thus, "decline rates" kick in most significantly at the beginning of a well's life - if there is no cap-ex, then there will be decline, and it will be more significant in the early life of a field.

Many old fields that were super giants in their day continue to produce at MUCH lower rates for years after their prime days. I remember when we shut in the Dammam #7, I think it was in 1982, in Saudi. The #7 was the first successful commercial well in Saudi, drilled in 1938 and produced pretty much continuously for 45years. The Dammam field was shut in because it only produced about 30,000 barrels per day, and with a crude glut, the old GOSP and related facilities needed more capital improvement than the marginal production would justify!

Jul 29 02:40 PM

[Davewmart:]

MarkitWacha,
For the US although not for Europe or Japan using NG for cars is a real possibility.
The NG market is far more regional than that for oil.
There would seem to be plenty of spacious old clunkers available for conversion even after the scrappage program as it will only affect a few hundred thousand cars out of the US's vast fleet.

Jul 29 02:44 PM

[Alan von Al...:]

That's the basic conundrum, the sheer scale of US fleet, roughly 250 million passenger vehicles. I agree that regional rollout makes sense.

@happycajun - always a pleasure to read your comments.

Jul 29 04:05 PM